How Steeply Discounted Are Non-Performing Notes from Banks/Unions

15 Replies

Hello BP Friends!

My background is in REI but I'm brand spanking new to "Notes". My interest is in non-performing notes.

I'm hoping members who have a solid background in NPNs could help answer my question.

I'm looking for NPN-sellers who are willing to sell one-off notes. I wish to ideally buy to BRRR but I wouldn't be opposed to flips, getting them to perform or even selling them at auction.

So my question is... based on your experience, are hedge funds buying NPNs from the top 10-15 banks, re-selling them at a steeper discount than smaller banks and credit unions? Or are smaller banks and credit unions willing to let go of their NPNs for less than hedge funds?

I'm preparing to spend a heavy amount of time in establishing relationships with hedge funds and/or banks/credit unions and it would be of tremendous value to learn which are better to go after.

I completely understand things are all case-by-case but I'm just looking for a generalized answer if you had to pick one.

Much appreciated in advance.

Updated about 1 month ago

One thing that might be worthy of mentioning is I have about $5 mil in private money ready to deploy from the fix and flips we do with direct to seller opportunities and I'm looking to diversify into NPNs.

Generally banks do not sell one off here and there, and like to move their defaulted debt in one trade. This oftentimes includes a myriad of debt other than residential, such as commercial, unsecured, Etc.

In my experience, the discounts are often better buying from hedge funds who are looking to liquidate a particular tranche as it reaches it dissolution date.  Also, there are a few hedge funds that have direct relations to some of the larger banks and buy all their residential defaulted debt, then flip it to downstream buyers.  The discounts can be pretty decent depending on the underlying collateral.  Some will sell one offs, however generally the larger the amount you have to deploy, the bigger the discount.  

Success in this business is highly predicated on establishing relationships with these sellers.  

My partner and I buy mostly from the same Funds because of ease of doing business. I can't say if small banks and credit unions are willing to sell at steeper discounts but I suspect not. As a general rule, most people trading loans are aware of the going market rate for loans. Unless there is a specific reason that's out of the ordinary, most banks and hedge funds are trying to get the most they can get.

I've seen one smaller regional bank willing to take more of a discount because the pool they bought had a couple of rezi loans and they were focused on the rest of the commercial loans which is what they really wanted.

If you are looking for larger portfolio, I doubt you will find it from smaller banks and credit unions (you may but it would take a lot longer) than finding it from private entities such as a private equity fund. 

I have had some assets come through from banks and I have found to get much better deals from larger funds than I have for banks, as it relates to the size of the discount, that varies significantly on many factors as I have paid anywhere from 10 cents to 90 cents for an asset.

Thanks guys for the reply. This is really helpful.

https://www.distressedpro.com/...

The reason why I ask is this site above has all (maybe?) the resources available to get started with connecting with banks and credit unions.

I understand big banks won't work with one-off note buyers. Plus one statement he makes is this, "They’re not so big that a small sale won’t impact their books" with "REGIONAL AND COMMUNITY BANKS".

This leads me to believe the majority of the deals from smaller banks and credit unions won't be discounted enough to pay for holding and closing costs, foreclosure, rehab, etc... and still make a nice profit.

I just signed up for the software and training but I'm still in my 30 days to cancel.

It's not a large investment of capital but I'm more concerned about the time I'm going to waste trying to build relationships that won't provide results that align with my BRRR goals. I'd like to be at 75% of ARV or less all-all-all-in.

So it sounds like everyone here has had more success working with equity and hedge funds than small banks and credit unions.

I would love some guidance as to where to start finding these funds. Is there a similar software to distresspro's BankProspector's app for equity and hedge funds?

    @Dan Nguyen The deals for underwater NPNs come when you find an information differential on property value. If the seller thinks the property is worth $100k but your research shows it's worth $150k, he might accept your $75k offer, which is 75% ITV according to him instead of the 50% that you're actually getting it for.

    Also, BRRR is much more difficult to accomplish with notes. Not may lenders out there willing to lend on notes.

    @Dan Nguyen   There are several platforms where people will sell smaller pools or individual notes, several from institutions rather than seller-financed notes (e.g. PAC, Revival Brothers).  You can also do what Chris and others have suggested and make those relationships with equity funds.  

    For me, I'd rather have someone else build those relationships.  A lot of time, if you don't have capital to deploy for a pool, the funds won't want to work with you.  

    I belong to a program called the Note Assistance Program and one of their big selling points besides the education (which you can get elsewhere) is that they have a trade desk.  The owner of the company has the relationships with hedge funds and sellers already, and she brokers the tapes she gets from there.  For me, that cut out a huge amount of effort and allowed me to scale quickly without having a large amount of capital.  I can also buy one or two notes at a time or a small pool.  

    ETA: I usually get NPN discounts from 40%-70% and PN from 80%-par from the trade desk

    Originally posted by @Andy Mirza :

    @Dan Nguyen The deals for underwater NPNs come when you find an information differential on property value. If the seller thinks the property is worth $100k but your research shows it's worth $150k, he might accept your $75k offer, which is 75% ITV according to him instead of the 50% that you're actually getting it for.

    Also, BRRR is much more difficult to accomplish with notes. Not may lenders out there willing to lend on notes.

    Wow... that's super helpful. Thank you. So deals come from slippage. I had no idea. 

    I've seen tapes from hedge funds from my local REIA and often times with judicial states, they ask for 50-60% of UPB. Wasn't sure if small banks and CU will allow for the same discount range.

    And question about your BRRR statement. Are you not able to buy using private money, foreclose it into your name and then refi with a traditional/portfolio loan after you stabilize?

    @Dan Nguyen To your question to Andy about BRRR. Yes, you can do what you stated. But, there's no guarantee you'll get the property back if you foreclose. In most states, it goes to a foreclosure auction and only comes back to you if it doesn't sell at auction. And if there are secondary liens against the property, they might still have claim to the property for a period of time (IRS is 120 days) which means you can't get refinance until after those liens are cleared.

    @Dan Nguyen I wouldn't waste my time with calling on banks. It takes a lot of time to establish a relationship with the contact in charge of dispositions, it's almost like reverse sales. And as I mentioned above, in most circumstances, unless you're willing to buy ALL their problem debt will not be much help. I've also heard others get through to banks only to find they want par for their NPN's. The best way to establish relationships with funds is to join some networking groups, attend the defaulted debt conferences or partner up with someone who already has the relationship and offer some value in exchange for working with them.

    One thing I will stress upon though, you need to get educated, but if you join a guru class or workshop, DO NOT buy from them as it is a complete conflict of interest.  I've heard many horror stories where a "student" was sold a loan by their mentor/teacher/guru and ended up being a total disaster and they never bought any more.   

    @Dan Nguyen I misunderstood what you meant by BRRRR. I thought you meant: buy NPN with your own money and then refinance the note purchase using the note as collateral with bank or institutional money. Then go out and buy more notes.

    Yes, you can BRRRR if you mean buy a note, foreclose, take the property as REO, and take your money out by refinancing the property.

    This should only be one exit of a multi exit strategy business model. Some RE investors have it in their heads that buying NPNs is the same as buying RE. This is a mistake. You're buying a loan and the borrower has rights under the loan agreement, which conflict with the mentality of "I'm just going to foreclose and take the property." 

    What the borrower does is outside of an investor's control and can greatly affect timelines. You might think you're about to liquidate an asset at foreclosure sale when the borrower files Ch 13 BK on you and extends your timeline out by 5 years. 

    @Dan Nguyen An additional approach would be marketing to private investors and SD IRA holders that have bought notes that turned non-performing or they bought as non-performing and are tired of the headaches. Many of the notes sold as re-performing have a higher likelihood of going non-performing again (especially when less than 12 months of re-established timely payments). It doesn't work for investors wanting portfolios but it is a unique angle for one-off NPNs rather than going after banks and hedge funds.

    @Andy Mirza "What the borrower does is outside of an investor's control and can greatly affect timelines. You might think you're about to liquidate an asset at foreclosure sale when the borrower files Ch 13 BK on you and extends your timeline out by 5 years."

    Great insight. The thought of BK didn't cross my mind even though I'm dealing with multiple sellers whom had included their house in their BK right now.

    @Tracy Z. Rewey Thanks for the tip. My business currently prospects direct to sellers and honestly, the reason why notes are attractive to me is the idea of tapes from institutions. Seems like a business I'd do well in and would actually enjoy.

    I understand it still requires work to establish these relationships but it would be awfully nice to have repeat business over and over vs deal chasing one and done deals.

    By the way, I have full intentions on attending your cash flow expo =)    (credits owed to @Alecia Bolton for the recommendation)

    @Chad U. "The best way to establish relationships with funds is to join some networking groups, attend the defaulted debt conferences" I definitely would put effort into networking but is there a way to find these hedge funds online?

    @Dan Nguyen there are a few online marketplaces where loans are sold such as Paperstac, Notesdirect, Watermark Exchange, Direct Source, etc.  Oftentimes once you establish a rapport with a particular seller, can start buying them directly.  

    @Dan Nguyen Familiarity with Ch 13 and 7 bankruptcies, how some borrowers abuse the system, and how to defend against those borrowers, are key parts of my business model. I can act smarter and more quickly than big banks resulting in far shorter liquidation timelines.

    Originally posted by @Dan Nguyen :

    @Tracy Z. Rewey Thanks for the tip. My business currently prospects direct to sellers and honestly, the reason why notes are attractive to me is the idea of tapes from institutions. Seems like a business I'd do well in and would actually enjoy.

    I understand it still requires work to establish these relationships but it would be awfully nice to have repeat business over and over vs deal chasing one and done deals.

    By the way, I have full intentions on attending your cash flow expo =)    (credits owed to @Alecia Bolton for the recommendation)


    I hear you - direct marketing  is a never ending cycle.  It is definitely a win when we get a repeat seller or develop a referral base through professionals.  There are more exchange sites and listing platforms providing access to NPNs but getting direct to the source increases the profit margins for certain.